News Column

States Ranked: Dependency on Washington

Nov. 27, 2012
Federal Spending

New research produced by Harvard's Institute of Politics (IOP), the University of Pennsylvania's Fels Institute of Government and the American Education Foundation (AEF) finds state and local governments are carrying over $7 trillion in debt. The new 'State of the States' report also offers nonpartisan analysis on the FY 2011 finances and budgets of four U.S. states: Massachusetts, New Jersey, New York and Pennsylvania - and shows an end to federal fiscal stimulus is causing states to close widening budget gaps by cutting funding in education, infrastructure and other key programmatic areas. All information and full reports are available at: www.thestatesproject.org.

The report aims to stimulate conversation about the fiscal challenges of state governments at a time when U.S. states are struggling with budget deficits, falling tax revenues and strapped social programs. Based on The Annual Report of the USA, a publication of the Harvard Political Review - a top undergraduate journal on politics and public policy - the state reports offer reliable, clear, straightforward examinations of state budgets, public policy and the overall fiscal health of each state. Analysis addresses overall economic trends, including unemployment rates, the finances of pension programs and educational budgets - and offers a context for understanding how public policy affects all citizens.

"Our students were excited to work on the 'State of the States' project, an important effort to shed light on the true financial condition of our states today," said Trey Grayson, Director of Harvard's Institute of Politics. "In these tough economic times and uncertain future, promoting more openness and information between citizens and their government is a critical goal."

"Total state and local debt is now almost half of what the national debt is - but nobody talks about that," said 'State of the States' senior editor Alex Palmer '12.

"Health care is swallowing up huge chunks of state budgets, leaving less and less for states to spend on programs that help economies grow like education and infrastructure," said Meredith Bagby, Spring 2004 Harvard Institute of Politics Resident Fellow and Executive Director, AEF.

The report's key findings include:

-- State and local governments are carrying over $7 trillion in debt. Over half of that debt is not reported in the official financial statements produced by state and local governments.

-- Federal fiscal stimulus to states has ended. As a result, states have faced budget gaps totaling $55 billion in FY 2013. States are closing those gaps by cutting spending (largely for K-12 education, higher education, and infrastructure) rather than raising revenues.

-- Twenty percent of Americans are on Medicaid. Medicaid has been the largest category of state spending for the last three years and its growth is outpacing inflation, largely due to the effects of the Great Recession.

-- Medicaid is "crowding out" spending on other state priorities: as a percentage of state expenditures, total K-12 education spending has dropped 2% since FY 2008, while spending on Medicaid has increased 2%.

-- Total spending on infrastructure is down 20% since FY 2009.

-- As measured by independent economists, state pension plans carry roughly $2.5 trillion in liabilities; health care benefits carry over $600 billion. None of these liabilities are reported in state financial statements.

-- States often manipulate their accounting rules to show a balanced budget, when in actuality a deficit exists. States can delay payments into future years (like tax refunds, or pension contributions), raise debt to cover the deficits (moving that debt off books using component units like transit authorities), and borrow from state funds meant for other uses (such as funds meant for infrastructure or environmental protection).

-- The "fiscal cliff" is coming on January 1, 2013, meaning that the federal government will have to find trillions in cuts over the next 10 years. While grants to states make up only 16% of the federal budget, they make up 40% of the discretionary portion of the budget. State block grants will be a prime target for national budget cuts and states may pass federal reductions down cities -- the most vulnerable level of government, which rely on state block grants for 34% of their revenues.

The States Project has also published rankings of states based on fiscal stability, levels of debt, economic opportunity for citizens, educational attainment, and health and wellness. States which had the best overall fundamentals include: Virginia (#1), Minnesota (#2), New Hampshire (#3), Utah (#4), and Massachusetts (#5).

The states that scored the lowest in the rankings were: Mississippi (#50), Nevada (#49), Louisiana (#48), West Virginia (#47), and Alabama (#46).

Harvard undergraduate and graduate students helped the project's small, elite team of economists, accountants, writers, and graphic designers to analyze data. Following publication, project partners will continue to promote the reports as an educational resource for a variety of constituencies including government officials and policymakers, the media, middle schools, high schools and universities.

The States Project is a joint venture of Harvard University's Institute of Politics, the University of Pennsylvania's Fels School of Government and the American Education Foundation, a nonpartisan 501(c)3.



Source: Copyright PRNewswire 2012